Registered Disability Savings Plans

The Registered Disability Savings Plan [RDSP] is a Canadian savings plan. It is similar to the Registered Education Savings Plan (RESP). If an individual qualifies for the Disability Tax Credit, (for individuals that have a severe and long-term physical or mental impairment) and is under the age of 60, they may be eligible for a Registered Disability Savings Plan. The beneficiary will receive the money invested in the RDSP.

Anyone who has written permission from the plan holder can contribute to the RDSP. The person holding the plan can be one of several individuals of legal age who can enter into a contract legally. This could be a parent or guardian of the disabled individual. This could also be a public agency that is legally authorized to act for the beneficiary.

Contributions are not tax-deductible and can be made into the plan until the year the beneficiary turns 59. Payments to the disabled beneficiary begin when the beneficiary turns 60 years of age. There is no annual limit on the total amount contributed, however, $200,000 is the overall lifetime limit on the contributions made to the plan.

Contributions made into an RDSP are matched by the government of Canada through the Canada Disability Savings Grants (CDSG) and the Canada Disability Savings Bonds (CDSB). Both of these can be received until the year that the beneficiary turns 49.

The CDSG has a lifetime limit of $70,000 and an individual may get a maximum $3,500 of matching grants when there is a contribution amount $1,500.

The CDSB has a lifetime limit of $20,000. The bonds do not require contributions.

The rules are complex governing the withdrawal of funds from RDSPs. These rules mandate that the beneficiary may have to repay the government grant and bond money back if:

• The RDSP is closed voluntarily
• Deregistration of the plan
• A Disability Assistance Payment is made from RDSP
• The beneficiary is no longer eligible for the Disability Tax Credit
• The beneficiary dies

There are cases in which a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP) may be more beneficial than an RDSP. This is because people who use these plans receive a tax break on income generated in a TFSA or when contributing to an RRSP. There are no such tax breaks for an RDSP. Instead, they have grants and bonds whereas the other plans don’t.

Because RDSPs are more restrictive than the other plans, it is important to contact a reliable financial planner to assist you in determining which plan is most beneficial for the beneficiary.

RDSPs are an excellent option for disabled Canadians and their family members. They are not the only option. It is important to understand the pros and cons of each savings plan.

For family members of a disabled individual, setting up a trust for their disabled relative that utilizes grants and bonds may very well be a lucrative option to low-income taxpayers.